Prodi threatens to cut Britain's EU rebate

The future of Britain's EU budget rebate, worth around €3bn (£2bn) a year, was thrown into doubt yesterday as the European Commission said it would table detailed plans this month to share its benefits with other countries.

The move was given enthusiastic backing by the Prime Minister of the Netherlands, which took up the revolving presidency of the EU yesterday, and marks the start of a fierce battle for Tony Blair.

The rebate was won by Margaret Thatcher at a summit in 1984 after she famously demanded her money back, and has remained a potent political symbol. But speaking after a meeting with the incoming Dutch presidency, the European Commission president, Romano Prodi, described the mechanism, which applies only to Britain, as "belonging to another period of European history".

Designed to compensate Britain for the fact that it pays much more into the EU than it gets back, the rebate is protected until the end of the current financing period in 2006.

But Mr Prodi said that, on 14 July, he will put forward detailed plans for the next funding period, including a proposal to revamp the rebate into a general correction mechanism for all big payers. This would help other nations, such as Germany, the Netherlands, Austria and Sweden, which put more into EU coffers than they take out.

Officials said that the formal spending proposal would, for the first time, include figures on the financial impact of a generalised correction mechanism on specific countries.

Jan Peter Balkenende, the Dutch Prime Minister, promised to put the ideas to EU finance ministers and said: "The ordinary Dutchman pays six times as much as the ordinary Frenchman [into the EU]. We have to rethink the situation of the countries that are net contributors. We have to work on a correction mechanism to get the situation a bit better for the Netherlands."

When the new financing deal for the EU is negotiated next year Mr Blair will have a veto and could block any agreement unless the rebate is retained. But he will be isolated and face pressure from the other net contributing countries. In addition the 10, mainly ex-Communist member states which have just joined the EU, also resent the fact that they - among all EU countries - have to contribute to the rebate even though several nations are extremely poor.

Some diplomats believe Mr Blair may accept the principle of a more general system, providing the UK still gets a reasonable level of compensation. However the discussions will be acutely sensitive as they are likely to come to a head either before Britain's next general election or its referendum on the new EU constitution.

A British official said: "The UK's rebate is fully justified. It exists because of the distortion on the expenditure side. We will consider other peoples' claims where other people believe they are disadvantaged by the systems. But our position must be fully protected."

The Dutch presidency is likely to be at odds with the Commission's general proposals for spending in the period from 2007-13. The Netherlands was one of a number of nations, including Britain, which called for a tight curb on spending increases. The Commission's expenditure plans, which will also be published on 14 July, are likely to defy these calls.